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The Dynamic Response of Municipal Budgets to Revenue Shocks

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  • Ines Helm
  • Jan Stuhler
Abstract
We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany's fiscal equalization scheme triggered by census revisions of population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while the adjustment to losses is more rapid. Yet the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical anomalies such as the so-called flypaper effect may thus reflect a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.

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  • Ines Helm & Jan Stuhler, 2024. "The Dynamic Response of Municipal Budgets to Revenue Shocks," American Economic Journal: Applied Economics, American Economic Association, vol. 16(4), pages 484-527, October.
    • Handle: RePEc:aea:aejapp:v:16:y:2024:i:4:p:484-527
    DOI: 10.1257/app.20220718
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    Cited by:

    1. Nora Gordon & Sarah Reber, 2020. "Federal Aid to School Districts during the COVID-19 Recession," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(3), pages 781-804, September.
    2. Jeffrey Clemens & Stan Veuger, 2024. "Intergovernmental Grants and Policy Competition: Concepts, Institutions, and Evidence," NBER Chapters, in: Policy Responses to Tax Competition, National Bureau of Economic Research, Inc.
    3. Flynn, Patrick & Smith, Tucker, 2022. "Rivers, lakes and revenue streams: The heterogeneous effects of Clean Water Act grants on local spending," Journal of Public Economics, Elsevier, vol. 212(C).
    4. Simon Berset & Martin Huber & Mark Schelker, 2023. "The fiscal response to revenue shocks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 814-848, June.
    5. Shani, Ron & Reingewertz, Yaniv & Vigoda-Gadot, Eran, 2023. "Intergovernmental grants and local public finance: An empirical examination in Israel," European Journal of Political Economy, Elsevier, vol. 79(C).
    6. Cassidy, Traviss, 2017. "Revenue Persistence and Public Service Delivery," MPRA Paper 114464, University Library of Munich, Germany, revised 06 Sep 2022.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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